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Econographics January 31, 2022

Strengthening ties: China and the GCC

By Inbar Pe'er, Niels Graham and Mrugank Bhusari

China is not allowing foreign visitors to watch the Olympics in person next week. Yet on January 10th, a high-level delegation of Gulf Cooperation Council (GCC) members, including its secretary-general and the foreign ministers of Saudi Arabia, Kuwait, Oman, and Bahrain, was welcomed by their Chinese counterparts to China’s Wuxi province. Why? To discuss a range of diplomatic issues and expedite the implementation of a China-GCC free-trade agreement (FTA). 

Though the i’s haven’t been dotted nor the t’s crossed, the Chinese ministry said both sides agreed to conclude negotiations for a bilateral FTA as soon as possible. Final negotiations over the details of the deal might still take a while, but all parties have clearly expressed their eagerness to see it through. This should come as no surprise. In 2020, China replaced the European Union as the GCC’s largest trading partner with bilateral trade valued at $161.4 billion. Furthermore, the bloc is a central pillar of China’s Belt and Road Initiative — the UAE and Saudi Arabia ranked second and third respectively as top destinations by volume for Chinese construction projects under the initiative. 

Negotiations for a China-GCC FTA began in 2004. However, they were suspended in 2009 when China decided to maintain tariffs on GCC petrochemical exports to protect its domestic chemical industry. Negotiations were further hampered by Sino-GCC disagreements over the conflict in Syria. Talks resumed in 2016 when the PRC assured the Gulf states they were willing to forge ahead. But then a diplomatic crisis between GCC members prevented progress. After nine rounds of talks and many promises over the course of eighteen years, the big question is whether a deal’s actually coming this time around. 

If you ask China and the GCC, they’ll tell you that the time is finally ripe. They’re not wrong — several significant changes affecting both sides’ geopolitical interests have taken place in recent years that substantially raise the likelihood of an official agreement. 

First is the evolving relations of the GCC with Iran. Uncertainty over the Iranian nuclear deal negotiations in Vienna has worried member states of the GCC not only of the threat of a nuclear Iran, but also of the risk of a direct confrontation between the United States and Israel against Iran, where the Gulf countries would pay a heavy price. The need to de-escalate tensions and to consolidate a united front in the face of the shared prospect of regional instability has thawed frictions between GCC member countries. After an almost four-year Saudi-UAE diplomatic and economic boycott of Qatar, in early 2021 all sides reached a rapprochement. At the GCC Summit in December 2021, member states agreed to economic reforms meant to bring the bloc closer together. Bridging differences among GCC states is a welcome sign for a potential GCC-China FTA.

Simultaneously, China has indicated its intent to deepen economic ties with Iran with the signing in March 2021 of a 25-year cooperation agreement that exchanges Chinese investment for Iranian oil. The GCC bloc is aiming to incentivize Iranian compliance with the nuclear deal through the promise of trade following the easing of sanctions. The Iranian Foreign Minister’s visit to China on the same day that the four GCC countries’ foreign ministers wrapped up their visit to China could signal the potential benefits of returning to compliance. 

Second is Washington’s withdrawal from the region. For decades, Gulf countries looked to the United States as a security guarantor in exchange for uninterrupted oil trade. Yet, over the past decade, Washington has weaned itself off Middle Eastern oil as it developed its own domestic oil production capacity. Furthermore, the US withdrawal from Afghanistan and its pivot to the Indo-pacific signaled to Gulf states that US priorities increasingly lie outside the Middle East. As their ties with the United States weaken, GCC members feel a more urgent need to boost and consolidate their ties with China as their new primary trading partner and provider of broad-scale economic development.

Third, China’s energy needs. As Washington’s imports from the region have fallen, Beijing’s have steadily risen. The country’s size and rapid industrial growth, combined with its relatively lackluster domestic petroleum resources, mean China has been the primary growth market for oil-producing nations. Major power outages and soaring energy prices have injected new urgency into China’s need to secure a stable supply of energy to meet its rising demands. As a result, Beijing is looking to boost bilateral relations with the oil-rich Gulf, which already supplies more than 40% of its oil imports. 

Since joining the World Trade Organization in 2001, China has steadily increased its engagement in FTAs around the world. By 2015, Beijing had FTAs with countries that together make up a greater share of global GDP than those that hold agreements with Washington. Over the last two years, China and the United States have clearly diverged in their approach to trade. Chinese President Xi Jinping has embarked on a worldwide trade spree and has free trade deals in the works with the GCC, Israel, Norway, Sri Lanka, Moldova, and Peru. Meanwhile, Biden has put a moratorium on trade until he determines the domestic economy is back on track. But the global economy will not wait until then. 

A potential China-GCC FTA should remind US policymakers that for Beijing, Washington’s absence means opportunity — both in the Gulf and on the international stage at large. As President Trump withdrew from the global trade arena, Xi moved in to fill the void. Under President Biden, who has largely kept Trump’s trade policy, China has joined the largest multilateral trade agreement in the world, the Regional Comprehensive Economic Partnership (RCEP), and applied to the Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP) and the Digital Economy Partnership Agreement (DEPA). Without a seat at the table, and unsupported by a thriving network of trade agreements, the United States will not be able to set norms for the multilateral trading system as China is seeking to do. 

Inbar Pe’er is a consultant to the GeoEconomics Center. She is also a program coordinator at the Saltzman Institute of War and Peace Studies at the School of International and Public Affairs at Columbia University.

Niels Graham is an Assistant Director with the GeoEconomics Center focusing on trade.

Mrugank Bhusari is a Program Assistant with the GeoEconomics Center focusing on global governance and human security.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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